Upper classes are a nations past, the middle class is its future—Ayn Rand

The Late, Great, American Middle Class

The meteoric rise of the Occupy Wall Street Movement and the Presidential election of 2012 focused the attention of this country on what perhaps may be the most pressing issue of our age, the decline of the U.S. middle class.

A myriad of data presents a clear picture of the economic pressures facing the middle and lower classes:

In 1971, 61% of adults lived in middle income households, by 2011 the share had dropped to 51%

The median family income has declined from an inflation adjusted $56,080 in 1999 to $51,017 last year

In terms of 2012 dollars, the median earnings of male workers in this country has not increased since the 1970s

The percentage of people living within 125% of the poverty threshold for a family of four of $23,492 has remained the same since the early 1980s at 35%

The bottom 90% captured 12% of this nation’s income growth from 2002 through 2007 versus capturing 65% of income growth from 1960-1969

The bottom 80% of Americans own 7% of this country’s financial wealth

Since 2000, the increases for housing, health care, and college costs have all been over 100%

A quite different picture appears for those at the other end of the economic spectrum:

The top 1% of Americans take home 24% of our national income, versus just 9% in 1976

The top 1% received over 60% of this nation’s income growth from 2002-2007 versus 10% from 1960-1969

The richest 5% of this country owns 69% of the financial wealth, while the top 1% controls 42% of the nation’s financial wealth

In 1982 the wealthiest 400 individuals in the “Forbes 400” owned $92 billion. By 2000, their wealth had increased to over $1.2 trillion

For the period 1987-2008, the adjusted gross income of the top 1% has risen 386% while their share of the total tax burden has risen 53%

The United States has the second highest degree of wealth concentration among all Western countries

Despite the recession of 2008-09, American corporations have also prospered:

Record Corporate profits are expected for 2013, estimated at over $2 trillion

Cash and short-term investments of the S&P 500 firms increased 13.5% over the past year to a record $1.27 trillion, up over 50% since 2006

Between 1980 and 2008, corporate profits are up 693% while the adjusted gross income of the bottom 75% of taxpayers grew 290%

The Dow Jones Industrial average and the S&P 500 index have set record highs recently

Corporate mergers and acquisitions, which typically eliminate jobs, totaled $27 trillion, twice the U.S. economy, during 2001 to 2010

CEO pay which averaged 100 times the pay of regular workers in the mid-1980s has risen to 320 times average worker pay, the top five CEOs in the Bay area combined for $250 million in compensation in 2012

Starting wages in the financial industry for graduates from top business schools this year are $150,000 with expectations for an additional six figure bonus

We should measure the success of our economy by the breath of the middle class, and the scope of opportunity offered to the poorest child to climb into that middle class—John J. Sweeney

Those who fail to learn from history are doomed to repeat it—Winston Churchill

One might inquire what were the primary factors that are driving this growing wealth gap between Americans? There are several:

Beginning in the 1970s, the outsourcing of manufacturing and tech jobs primarily to Asia

Employers are exploiting high unemployment, currently estimated at 11 million Americans

Tax cuts, which primarily benefitted the top 5% of Americans

Dwindling disposable income of the middle class along with low interest rates and distrust of Wall Street have all combined to produce meager returns on American savings

Capitalism will always pursue the lowest cost of labor, and this trend began in earnest during the early 1970s with the outsourcing of high paying manufacturing jobs in such areas as auto manufacturing, steel production, and ship building overseas. Next came the out flow of technology jobs to Asia. According to the National Science Board, over the past decade the U.S. lost 28% of its high technology manufacturing jobs. For the period 2000-2012, it is estimated the U.S. lost 687,000 high technology manufacturing jobs. Meanwhile, China became the world leader in high technology trade and, for the first time, Asia matched the United States in R&D investments. Since 2004, about 85% of R&D employment growth by U.S. multinational corporations has been aboard.

Besides shifting jobs to Asia, some corporations have tried more heavy handed and often illegal methods of restraining wages. A federal judge has recently ruled that Apple CEO Steve Jobs conspired with executives at Google, Intel and Apple to limit workers’ pay by barring them from moving from one company to another. Prior to this ruling, which affects 60,000 workers, Pixar, Lucasfilm, and Intuit reached a preliminary settlement in July on similar charges. In other industries such as data storage, workers going from one firm to another can face law suits. So, while corporate exec pay has soared, some of these execs feel their workers should work under a different set of rules.

The decline of the organized labor movement, as highlighted when President Reagan fired the air traffic controllers, has also contributed to the plight of working Americans.

However, there are drawbacks to chasing low labor costs.

The drain of high paying blue collar jobs in manufacturing has been cited as one of the primary factors behind the lack of economic progress minorities have made in this country over the past forty years.

The shift of jobs overseas has been one of the primary drivers of our expanding trade deficit. Until 1997, the United States enjoyed surpluses in the trade of high tech goods. But by 2010, those surpluses had turned into large annual trade deficits of nearly $100 billion. At the same time, China’s high tech trade surpluses reached $157 billion, and eight other Asian counties collectively enjoyed trade surpluses of $226 billion.

Both political parties have blamed each other for the slow pace of the U.S. recovery, yet they completely ignore how tight fisted business policies have constrained the disposable income of American workers.

In a famous court case, Henry Ford was asked why he was paying his workers $5 per day, double the going wage rate, and if that implied he wasn’t a good businessman? Ford’s response was that he hoped by paying such wages, that his employees would be able to purchase his cars. Unfortunately today, most American businesses are focused on the Chinese consumer rather than their American workers.

However, there are several signals that indicate the forty year decline in the economic welfare of the American middle class may finally be reversing.

The allure of cheaper labor in China is losing its luster as Chinese workers have become aggressive in their demands. In 2012, private sector wages in China rose 17.1% which came on top of an 18.3% jump in 2011. Since 2000, average wages have quadrupled in China. Higher wages along with rising energy costs has cut the differential in total manufacturing costs between China and the U.S. from 18% in 2003 to 7% this year.

Worker actions have risen significantly in China over the past five years. Poor working conditions have resulted in rising labor tensions and worker stress. Foxconn, which provides assembly operations for Apple and other American consumer electronics firms, had to install safety nets at its facilities to prevent workers from jumping to their deaths.

Loss of proprietary technology along with the challenges of managing plants on the other side of the world are two other issues causing some U.S. corporations to rethink their investments in Asia.

China’s low fertility rates, better health care and rising life expectancy will work against it in the years ahead as an aging society implies a changing cultural balance towards those who seek safety and stability and away from younger workers who want to prosper and acquire, traits that are the invisible drivers of economic growth.

The eventual exit of the Baby Boomers from the U.S. labor market as they retire coupled with the reemergence of the U.S. energy sector, which pays higher wages than the service industry, the leading producer of U.S. job growth, should also bode favorably for American workers in the long term.

The key question that remains is whether our leaders in business and government will have the foresight to nurture this revival or will the American Middle Class become a relic of the past century? As we have seen in the France Revolution and the Rise of Communism, the welfare of the middle class often dictates the fate of the country.